In 1H2022, hotel S-REITs posted the sharpest q-o-q recovery in portfolio RevPAR (revenue per available room) since the onset of the pandemic, said DBS in an Aug 2 report following the results reporting season for REITs. DBS says this surpassed its “recovery trajectory that estimates recovery to hit 70% of pre-pandemic levels in FY2022”.
The DBS report says the performance was led by a global recovery in both occupancy and room rates, except for Japan and China. Markets that have seen a three to fourfold surge in RevPAR from a low base included large domestic markets like the UK and US, which were building on a strong summer travel season, the report adds.
In a report dated Sept 9, OCBC Investment Research said the average occupancy rate of Singapore hotels for the first seven months of the year was 69.5%, up 18.9 percentage points (ppt) y-o-y but still 17 ppt below the average occupancy rate of 86.4% in the same period in 2019. However, average day rates (ADR) for the first seven months of this year had surpassed its pre-Covid levels to $220.9, boosted by strong travel demand, inflation and a tighter labour market.
“Travel demand remains strong after two years of travel restrictions and travellers are willing to spend on tourism. Along with a y-o-y growth in occupancy rate and ADR, RevPAR increased by 102% y-o-y to $153 in 7M2022, compared to $186 in 7M2019,” OCBC says.
DBS adds: “The travel recovery is well underway but we are pleasantly surprised about the strength in RevPAR seen in 1H2022, with most hoteliers reporting that portfolio RevPAR is up to 80% of pre-Covid levels, ahead of our initial expectations. Most importantly, we sense optimism that hoteliers continue to see pricing power heading into 2H2022, with most expecting to continue to hike room rates while also seeing occupancy levels fill up. In Singapore (around 40% of overall hospitality S-REITs’ exposure), the ramping up of travel ahead of a slew of Mice events is to drive performance higher.”
While the analysts sound most bullish about Singapore, they appear reasonably positive about the outlook in other developed markets. In the UK, the hospitality recovery is led by domestic tourism and intra-regional travel, UOB Kay Hian pointed out in an August report.
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“RevPAR for the UK has rebounded 48.8% q-o-q to GBP128 in 2Q2022,” UOB Kay Hian says, adding that the two UK hotels of CDL Hospitality Trusts (CDLHT) generated NPI of $5.8 million in 1HFY2022 ended June, an increase of more than fourfold. “The UK lifted all travel restrictions on March 18, 2022,” the report explains.
Retail investors and accredited investors may have been lulled into believing that Frasers Hospitality Trust’s (FHT) privatisation offer of 70 cents per stapled security was underwhelming. This was despite both the independent financial advisor and the proxy advisors advising that stapled security holders to vote for the privatisation. Proxy advisors ISS and Glass Lewis had recommended that stapled security holders vote for the amendment of the trust deed (which they did) and for the privatisation in the scheme meeting (which they did not).
“I believe the deal should have gone through. I thought it was a reasonable offer, above the market [price], and above the NAV,” says Charlie Chan, a stapled security holder of FHT. “When the valuers did the valuation, they knew about the recovery earlier this year. The analysts were calling for a reasonable recovery and valuers would expect a valuation increase due to the higher rents.”
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Sponsor support
According to the privatisation scheme document, the valuations were done based on each of the properties having a sole tenant, being the master lessee and with the occupancy rate at 100%, including the commercial component of ANA Crowne Plaza Kobe. The master lessee is Fraser Property (FPL).
The financial report for FY2021 ended September indicated that the master lease revenue and management contract revenue came in at $75.6 million and $20.5 million respectively. In comparison, for 1HFY2022 ended March, the master lease revenue and management contract revenue came in at $39.23 million and $8.4 million respectively.
The valuation certificates by Savills have capitalisation rates in Singapore at 3.5%, Kobe at 4.6%, Sydney 5%, Melbourne 5.25%, London 5.5% to 6.25%, Edinburgh 6.5%, Glasgow 8.25% and Dresden 6.27%.
Based on the latest valuation reports, the NAV per stapled security translated to around $0.6519, with the offer price providing a premium of 1.074x NAV.
Not only does sponsor FPL provide master lease support, it also guarantees eight months of security in cash with the exception of The Westin Kuala Lumpur which is in the form of a banker’s guarantee. Hence, in the view of the sponsor, privatisation appears to benefit stapled security holders.
Rationale for privatisation
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The scheme document cited three main reasons for privatising FHT. The first reason was muted growth in distributions per stapled security (DPS) and NAV since its IPO. Interestingly, the DPS and NAV of CDLHT showed similar trends.
Unlike FPL, City Developments (CDL) gave away CDLHT stapled securities to CDL shareholders as a distribution-in-specie. In one fell swoop, CDL could deconsolidate CDLHT’s debt levels and perhaps the trust’s less-than-stellar performance. In addition, this also leaves CDLHT open to having to acquire more hotels from CDL.
The second reason cited by FHT’s scheme document was the uncertain recovery after Covid-19 amid recessionary fears and inflationary pressures. The third and final reason was FHT’s small size which limited its liquidity and hence impacted its cost of capital.
Despite FHT’s “proactive pursuit of yield-accretive acquisitions and value creation through refurbishments and AEI”, the strengthening of the Singapore dollar against FHT’s operational currencies had offset gains made over the years, says the scheme document.
Yet another more immediate and important reason for the privatisation of FHT is the impact of rising interest rates on interest expense and the trust’s cost of capital. Analysts and investors have been focused on the impact of rising interest rates on DPU and DPS.
The movement in S-REITs’ trading prices is being affected by movements in risk-free rates. Risk-free rates are usually the yield on 10-year US treasuries or 10-year Singapore Government Securities (SGS). REITs trade at a “yield spread” above risk-free rates. When rates rise, unit prices fall to maintain the yield spread.
Further strengthening of the Singapore dollar could potentially limit any potential NAV and DPS growth from a Covid-19 recovery, the scheme document says. True to form, the failure to pass the scheme of arrangement has led to a sharp decline in FHT’s stapled security price.
“The market price has fallen quite a lot. We were trading around 60 cents when we are assured of a lot more recovery in the market. Now [FHT] is only at 54 cents,” Chan observes.
What’s next?
Investors may have to peruse FHT’s 1HFY2022 income statement a lot more closely to gauge the impact of rising costs and higher interest rates on distributable income. IG Markets, for instance, points out that rate-hike expectations were being ramped up after US inflation data was released on Sept 14.
The markets are expecting the 75 bp hike in the next Federal Open Market Committee (FOMC) meeting in the week of Sept 19–23. There is a 33% chance of a 100 bp hike scenario, IG Markets adds. Economists are now forecasting a 4.25%–4.50% “terminal interest rate” scenario versus 3.75%–4.00% before the data release. In other words, the current rate hike cycle which started in December 2021 when the Federal Funds Rate was at 0.25%, is likely to end only when FFR hits 4.5%.
The US dollar has already strengthened against all major currencies. The Singapore dollar is on an appreciation trend and is likely to remain firm against other developed market currencies, economists reckon.
Meanwhile, the Bank of England and the Reserve Bank of Australia are raising rates (see charts). This implies rising interest costs for FHT’s six properties in the UK and three properties in Australia when refinancing is due. Fortunately, 87.8% of FHT’s debt is on fixed rates.
“London hotels are doing fine, but utilities are a huge problem because utility costs have gone up. In addition, because of Brexit, the allowance for immigrants has fallen. When the UK was in the EU it was a lot easier to get staff. RevPAR and average room rates are high but some hotels are not able to fully rent out rooms because of labour shortage,” Chan observes.
FHT’s security holders looking for upside may have to wait. Prices could recover. However, another privatisation offer from FPL is unlikely for 12 months, based on local regulations. Furthermore, since FHT has a September year-end, the sponsor may have to wait till the FY2023 yearend results are out before making an offer indicating that the sponsor may only make an offer nearer November or December 2023.
On Sept 12, after the scheme meeting, Eu Chin Fen, CEO of the FHT managers, said: “We would like to thank our stapled security holders who have voted and we respect their decision and the outcome of the meetings. While we believe that privatisation has its merits, stapled security holders have expressed their preference for FHT to remain listed and we are heartened by their support and confidence for FHT. We shall remain focused to ride on the gradual recovery trajectory and navigate through the challenges and opportunities ahead of us. We continue to stay committed to create and deliver long-term value to our stapled security holders.”
On Sept 13, after the privatisation failed, FHT’s volume surged to more than 100 million stapled securities. “After FHT started trading again, it fell to 54 cents. It was a fairly hefty fall so I bought some securities at 54 cents. Who knows whether this is the floor?” Chan wonders.
